This post isn’t about the tactics we used once we started getting
interest, I’ll share that with you later and you should check out
VentureHacks. The point of this post is more to
share how we put ourselves in a position to get interest from
high-profile tech investors. Hopefully, it well help you as you
try to do the same.

Note: We didn’t think of raising money as a goal. I
highly encourage you to consider starting a boot-strapped cash-flow positive
business. For us, the ideas we working on needed scale before
we could monetize them which required us to raise funding.

How We Did It

Below are the the key moments in our journey:

Realized we needed traction. This was key.
Unless you’ve successfully started another company or have
serious domain expertise (we didn’t), you need traction.
Traction is essentially positive momentum in customer growth.
For us, it would mean sharp user growth. Trying to raise money
before traction is largely futile. So, we stopped putting
together business plans and powerpoint presentations and set
out to build a prototype that would get us traction.

Built relationships with potential investors.
While we built our prototype, we started meeting with potential
investors. To be *very* clear, we were not asking them
for money and didn’t bring presentations. We just wanted them
to know who we were and what we were working on. The first two
investors who committed to our round came from these early
meetings. I also remember another investor positively
commenting that “we were known entities”. In other words, they
were more comfortable investing in people they had known for a
while.

Released our prototype. The initial version of
Yipit was an aggregator of all sample sales, happy hours, deals
happening in New York. We put out a private beta in June
of 2009 and publicly released it in December of 2009. By end of
January, we had a few thousand people signed-up. Not bad,
but we didn’t have real momentum.

Decided to raise a small seed round. At this
point, we had been living off of our savings and had decided to
finally raise a small seed round to cover our expenses and
start paying ourselves a small salary to end our savings
leaking. We met with a few investors and they weren’t
interested. We didn’t have traction. So, we immediately
canceled meetings with other investors. We instead turned to
people who were willing to invest in us because
they believed in us: our friends and family. We
quickly closed the round in late January.

Pivoted to focus on aggregating just daily
deals. During our meetings with investors, we heard
two business critiques: we couldn’t easily scale to other
cities (this was true) and it would be hard to monetize beyond
basic email advertising (also true). Fortunately for us, while
we spent all this time organizing deals, a very successful
company launched called Groupon that created deals in cities.
By late January, there were 12 companies now doing exactly what
Groupon did. We then pivoted Yipit in February to just focus on
aggregating these new daily deals. The new version addressed
the two main concerns we had heard from our investors: we
launched in five cities and we could monetize via affiliate
relationships.

Successful Pivot (Y-Axis is Subscribers)

Pivot got us traction. As you can see from the
chart, our user growth shot up and we now had real momentum and
traction.

Investors started calling. By April, we
started getting calls from investors wanting to know more about
Yipit. At this point, we were getting buzz in the press,
signing up users and the industry was on fire as Groupon and
LivingSocial were raising huge rounds and there were now 40
plus daily deal services.

Decided to raise large seed round. We
decided to raise around $1 million round to build out the team
and give us 18 months to hit certain milestones. Because we had
built up relationships with investors, we didn’t have to cold
email anyone. We just reached out to them and met with the
investors that were calling us.

Demonstrated we weren’t naive. As a first
time-entrepreneur, investors are worried you are naive about
the challenges facing your startup over the next 12 months.
Every startup has risks and your startup and our startup are no
exceptions. When an investor would bring up a risk, we wouldn’t
vigorously defend ourselves saying it wasn’t a risk. Instead we
would tell them that it was a real risk for us and we were very
focused on mitigating that risk over the next 9 months by doing
X, Y and Z.

Got first lead investor. RRE was the
first to commit to investing in us and it all got really easy
from there. The social proof of having an investor with a great
reputation backing you does wonders for your fundraising
process.

Closed up the round. We had calls, meetings
with potential investors almost every day in May and closed the
round at the end of June. Aside from investors reaching out to
us, the best source of investor leads is to ask the investors
who are committing to recommend other investors that might be
interested. We also used VentureHack’s
AngelList at the very end. (Will be sharing more about
our experience closing the round in future posts).

Getting Traction was HUGE As you can see, getting traction was
huge for us. But, we were also well-positioned to take advantage
of it because we had built relationships with investors and had
been keeping their feedback in mind. If you’re trying to raise
money as a first-time entrepreneur, I really recommend you get a
prototype out there and find your traction before you spend time
creating decks and pitching investors. And, if you need to raise
money in order to build a prototype, you are underestimating what you are capable of.

Much more to come on our fundraising experience. Follow along
viaRSSortwitter.